As traditional exit options become scarce, venture capital funds are increasingly turning to secondary markets to offload their stakes, albeit often at substantial discounts.
This trend was highlighted in a discussion with CNBC-TV18’s Nisha Poddar, featuring insights from industry experts Ashish Fafadia of Blume Ventures, Pankaj Naik of Avendus Capital, and Anand Lunia of India Quotient.
Pankaj Naik explained that the banking community is largely engaged with a variety of financial products, with many companies currently preparing for initial public offerings (IPOs) and block trades due to favorable capital markets.
Over the past four to five years, private secondaries have facilitated around $7.7 billion in exits, which is comparable to or even exceeds the volume of IPOs and block trades, particularly in the tech sector.
He highlighted that mergers and acquisitions, especially those involving cash, have been relatively rare.
A new trend in the market is the rise of portfolio secondaries, where large secondary-only funds buy out entire GP (General Partner) portfolios.
This approach has seen substantial capital being raised globally.
In India, the market for these transactions was initially limited, particularly in the tech sector. However, with the increasing maturity of companies, the trend of institutional secondary investors purchasing private secondary portfolios is growing rapidly.
High-net-worth individuals (HNIs) are also actively participating in acquiring high-quality venture capital portfolios, although these transactions are smaller in size compared to institutional secondaries.
Both the institutional and individual secondary markets are currently very active alongside IPO and secondary exit markets.
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Ashish Fafadia outlined two prevalent models in secondary buyouts. The first model involves a complete takeover where the investors are replaced, but the company’s progress continues uninterrupted.
This approach is most effective in markets where private equity and venture capital investors have completed several investment cycles, providing visibility and depth.
These transactions often serve as a bridge, allowing companies an additional two to four years to reach an IPO while the original investors exit.
The necessity for such exits usually results in a discount because venture capitalists or private equity investors need to liquidate their positions as their fund lifespans conclude. Secondary investors step in to provide the required liquidity for these investors.
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